Transpacific box lines prepare to tear up contracts

Janet Porter - Wednesday 8 July 2009

TRANSPACIFIC lines are preparing to tear up annual contracts signed less than two months ago in a desperate bid to shore up their finances.

The 14 members of the Transpacific Stabilization Agreement issued a stark warning to their customers that freight rates agreed for service contracts signed in May were not sustainable over the typical 12-month term and may have to be renegotiated.

In an unprecedented move, that reflects the plight of the industry, the TSA issued a statement saying members had adopted a voluntary across-the-board increase of $500 per feu effective from August 10.

This will apply to rates for all commodities and all US destinations, the group said.

The emergency action follows the latest Drewry data showing that average rates for Hong Kong to Los Angeles cargo had dropped to just $900 per feu compared with more than $2,000 a year earlier.

TSA carriers also said they would pursue full implementation of the quarterly bunker fuel charge to reflect higher fuel prices.

In the Asia-Europe trades, lines have tried to drop all-in rates from July 1 and separate ocean transport from fuel surcharges, an effort that appears to be making headway.

Carriers also said a peak season levy may be imposed for eastbound transpacific cargo in addition to the planned general rate increase “if the market measurably strengthens and extensive peak season costs are incurred”.

TSA lines said that 2009-10 contracts were negotiated “in the midst of a severely depressed global economy, in which first quarter 2009 cargo demand from Asia to the US was more than 20% below levels of a year earlier”, with conditions in the second quarter showing only slight improvement.

“Competitive pressures to keep services operating and avoid further costly vessel lay-ups eroded even the minimum rate levels carriers tried to put in place in the trade in April,” said the TSA whose members saw average rates plunge by $1,000-1,200 per container in the seven months to May when the majority of contracts are renewed.

“The eastbound transpacific trade lane has been driven by panic, and panic is difficult to stop once it has begun,” said Hanjin Shipping’s container line chief executive WW Lee.

“With 2009-10 contracting nearly completed, lines have had a chance to assess the damage. From an industry-wide point of view the damage is serious, and if current rates are extended out over 12 months, it is likely that the trade will encounter significant financial challenges as well as basic service sustainability issues going forward.”

Given the depth of the slump, “it will be necessary for lines to engage with shippers in a renegotiation of contracts that do not provide for some form of interim rate adjustment,” TSA lines warned their customers. 

While acknowledging that they should not have given in to pressure to match short-term, concessionary rates in the market at the time contracts were being negotiated, the group also shared concerns voiced by customers in recent months that revenue deterioration would eventually lead to fewer lines operating at reduced service levels.

“Market forces will ultimately dictate how the current situation resolves itself,” said Evergreen Marine president Jack Yen.

“In the end this is about the cost of maintaining a viable transportation and logistics service in a challenging market, and investing for the eventual turnaround.

“Transpacific carriers did not make a strong enough case in their negotiations for stabilising revenue in the coming year. But the fundamental problems remain, as can be seen in carrier quarterly earnings reports and continued carrier and service consolidation,” he said.


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